Advantages of Accelerated Methods of Depreciation

Explanation

All three responses are correct as advantages of accelerated methods of depreciation.

The advantages of accelerated methods of depreciation are as follows:

I. They implicitly recognize the loss of productivity and increased maintenance costs over time. Accelerated methods of depreciation, such as the declining balance method or the double declining balance method, allocate a higher portion of the asset's cost to depreciation in the early years of its useful life. This reflects the fact that assets tend to experience greater wear and tear and require more maintenance as they age. By recognizing this loss of productivity and increased maintenance costs over time, accelerated depreciation methods provide a more realistic representation of the asset's economic value.

II. They allow deferral of taxes compared to the straight-line method, thus making more cash available for current operations. Accelerated depreciation methods result in higher depreciation expenses in the early years of an asset's life. Since taxes are typically based on taxable income, higher depreciation expenses reduce taxable income and, consequently, the tax liability. This allows companies to defer tax payments to future years, making more cash available in the present for operational needs such as investments, research and development, or working capital.

III. The lower depreciation charges in later years compensate for the greater uncertainty in future revenues. Accelerated depreciation methods allocate a higher proportion of an asset's cost to depreciation in the early years, resulting in lower depreciation charges in later years compared to the straight-line method. This pattern of lower charges in later years can be beneficial when there is greater uncertainty about future revenues or the asset's useful life. By reducing depreciation charges in later years, companies can better match their expenses to the revenue-generating capacity of the asset, which helps offset the uncertainty and volatility in future cash flows.

Therefore, the correct answer is: C. I, II & III